BIC TIP #1116: The Due Diligence Reality
Under Form 2-T, when a buyer breaches the contract, the seller’s remedy is limited. Specifically, the seller is only entitled to liquidated damages equal to the Earnest Money Deposit (EMD) and the Due Diligence Fee. No additional damages are recoverable under the contract.
Here is where this becomes especially important in practice:
- If Earnest Money is on the line, the seller may recover that amount plus the Due Diligence Fee.
- If no Earnest Money was deposited, the buyer’s financial exposure for breaching the contract is limited to only the non-refundable Due Diligence Fee already paid.
In other words, if a buyer has little or no Earnest Money at risk, walking away from the contract late in the process may carry minimal financial consequence.
Why This Matters for Sellers
This structure can create a misalignment of incentives. A buyer with limited funds at risk may not feel compelled to thoroughly evaluate the property early in the Due Diligence Period. Delayed inspections, incomplete investigations, or casual contract commitments can result in lost time, missed market opportunities, and unnecessary disruption for the seller.
Best Practices for Agents and Brokers
- Counsel sellers carefully on the risks of accepting contracts with little or no Earnest Money.
- Explain the practical limits of liquidated damages so sellers have realistic expectations.
- Encourage meaningful Earnest Money deposits when possible to align buyer commitment with seller risk.
- Educate buyers that Due Diligence is not merely an option period, but a critical evaluation window that should be used fully and promptly.
Understanding how remedies work under Form 2-T allows agents and Brokers-in-Charge to better protect their clients, manage expectations, and reduce avoidable contract failures.
A well-structured contract does not just allocate rights. It aligns incentives.
